Do you remember when you learned to ride a bicycle? Were you a quick learner or did it take practice? Did you start off with training wheels or a tricycle?
Regardless of the training method, hopefully, you got it eventually. Pedaling along while keeping balanced probably brought you the feeling of a certain freedom. Your friend's house down the street was suddenly a lot closer or the bus was no longer the only way to get to school. Having mastered the skill, you could file it away and recall it when needed.
So, what the heck does this have to do with investing? Recent publicity about University of Virginia research studies on problem-solving and how we typically default to adding something (vs. subtracting something) when asked to change or improve a process, design, etc., highlighted the innovations of Ryan McFarland, founder for Strider bikes. This research got us thinking about the parallels between riding a bike and having discipline in investing. We'll touch on the three that stand out the most and how we think they can contribute to better financial outcomes for investors.
One fundamental concept in cycling is the role of angular momentum in maintaining balance. Staying upright with the wheels rotating at a steady pace is much easier and enjoyable than frequent starts and stops.
Discipline in a financial plan is not dissimilar. Whether it is saving in a 401(k), maintaining a budget, or just sticking with an asset allocation, the ability to reach your destination can be positively impacted by building small, repeatable habits. As Einstein reportedly said, "compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."
Complicated Isn't Always Better
Anyone with young children or grandchildren has likely noticed the evolution in training aids for riding bikes. Strider's Ryan McFarland spent a lot of time and money on toys and aids (like training wheels) to help his son learn to ride a bike, but he was frustrated with the process and lack of results. So, McFarland decided to shorten the height of the seat and remove the pedals, giving his son the ability to plant both feet on the ground and propel himself "Flinstones" style.
This insight was rather profound because balance is a key element of learning to ride. You must gain confidence in maintaining balance and overcome the fear of falling. Tricycles and training wheels remove this aspect from the equation. If you truly want to learn to ride and experience that freedom, you must be able to balance.
From a financial planning and investment perspective, the ability to deal with uncertainty is akin to the ability to balance on a bike. There is no shortage of training wheel analogies in the industry and what most of them have in common is the promise of removing uncertainty from the equation. For example, if an investor has a mix of stocks and bonds in their allocation, some may recommend adding "alternative" investments meant to provide a different source of diversification or improve the portfolio's ability to withstand market volatility. But at the end of the day, no silver bullets can accomplish this because there are too many different risks and sources of uncertainty to navigate.
We believe success over the long term in investing means dealing with uncertainty the same way you need to deal with balance in riding a bike. And within the context of a financial plan, adding a whole bunch of training wheels meant to remove the uncertainty is likely less effective than starting with the basic concept of why uncertainty exists and how it is a key element in the returns that capital markets have delivered over the long term.
We Can Only Control Our Preparation and Response
Whether it is an energetic dog, a nasty pothole, or another cyclist, amateur and professional cyclists alike will tell you a crash or fall is bound to happen. We could have done everything right and been in a total control, but have an externality knock us off course.
This can happen in investing. Last spring is a perfect example. Stock markets were at all-time highs, unemployment and other economic data looked strong, and sentiment overall seemed high. In a matter of weeks, however, stock markets fell into bear market territory and credit spreads in bonds widened significantly. The fear of COVID-19's wide-ranging impacts quickly spread through markets and took no prisoners.
While these externalities can be a shock to the system, the more aware we are that they can happen and recognize that it is normal to be fearful when they do, the better equipped we may be to deal with them.
When we acknowledge what has happened and are clear about the steps we took to prepare for such an event--in the case of cycling, wearing a helmet for instance, or in the case of portfolios, understanding the range of potential outcomes for our asset allocation---we can reduce the chance of panicking. We can process the event, get back on the proverbial bike and keep going. Allowing panic to incite a big change, such as moving money out of markets and into cash during last spring's downturn, can undeniably lead to adverse consequences--these investors were left on the sidelines after equity markets not only recovered, but have reached new all-time highs.
Keeping Things Simple
For some people, the ability to ride a bike came naturally, But for others, learning to ride required assistance. The same may be said for the ability to be a disciplined investor. It may come easily for a few people, but many struggle with the concept. In these cases, seeking assistance from a professional is probably worthwhile. In both cases, keeping things simple by focusing on preparation, developing an understanding of the potential risks along the way, and communicating effectively about dealing with them should likely lead to a more enjoyable--and fruitful--journey.
The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2020, Lifeguard Wealth